CONTENTS MESSAGE TO OUR SHAREHOLDERS 2 COMPANY BACKGROUND 4 ORGANIZATION CHART 5 DATA ON DIRECTORS AND SUPERVISORS 6 INFORMATION ON PRESIDENT, EXECUTIVE VICE 8 PRESIDENTS, SENIOR VICE PRESIDENTS, VICE PRESIDENT, MANAGERS OF DEPARTMENTS REVIEW OF OPERATIONS 9 MARKET ANALYSIS 14 BUSINESS PLANS 19 INDEPENDENT AUDITOR’S REPORT 23 HEAD OFFICE AND BRANCHES 116 Message to our Shareholders Over the past year Taiwan’s economic momentum was weakened by the reorganization of the Cabinet, amendment of the capital gains tax on securities transactions, rises in fuel and electricity prices, and food safety incidents, and growth in private consumption was limited by stagnant salaries and thee migration of middle-class workers to take up jobs overseas. Foreign trade suffered from American and Japanese policies designed to bring manufacturing back home and from the depreciation of the Japanese yen, and private investment was limited by industrial transition and sluggish external demand, so that potential investors adopted a wait-and-see attitude. Internationally the past year was full of turbulence, mainly as a result of former Federal Reserve Chairman Bernanke’s announcement in June of the idea that QE might possibly be withdrawn ahead of time, causing a large bounce in interest rates on U.S. government bonds, a withdrawal of international capital from emerging markets, and large fluctuations in their stock, bond, and foreign-exchange markets. This was followed by the U.S. government’s short-term shutdown in October, and in December began a formal gradual withdrawal of QE. Hot money in the international market began flowing back to the U.S. on a massive scale, causing the U.S. dollar to strengthen, the U.S. stock market to reach successive record highs, and the bond market to turn weak. All of this affected international economic conditions. According to statistics compiled by the Directorate General of Budget, Accounting and Statistics (DGBAS), preliminary estimates put Taiwan’s economic growth in the fourth quarter of 2013 at 2.95%, bringing growth for the year as a whole to 2.11% and giving a per-capita GDP of US$20,958. With the expectation of continuing moderate recovery in the United States, the end of recession in Europe, a loose-money policy in Japan, and stable and balanced growth in mainland China in 2014, plus a strengthening of the domestic consumption atmosphere, export-driven demand and the warming up of domestic demand will lead to improved performance by Taiwan’s economy. DGBAS forecasts the island’s economic growth in 2014 at 2.82% and a continued growth in per-capita GDP to US$21,153. The Bank’s before-tax income in 2013 reached NT$4.748 billion (after-tax income was NT$4.062 billion), yielding an ROE of 12%. This performance not only exceeded the Bank’s internal targets but was above the market average. We carried out business readjustment in 2013 under the strategic focus of “Stable Growth, Organizational Restructuring” and, in contrast to the large-scale growth of the previous two years, our loan business expanded by 6% and profitability effectively improved, with the loan-deposit interest-rate spread increasing by 2bps. Besides the loan business, we moved to reinforce our financial structure by vigorously promoting growth in fee income; as a result, the Bank’s net fee income rose 11% in 2013, with especially good performance in the wealth management and forex businesses. Our TMU business also turned in an outstanding performance in 2013, with profit skyrocketing 288%. In terms of asset quality, bank-wide reserves against bad debts were boosted by NT$470 million over 2012. To maintain good asset quality, we wrote off a large amount of bad loans in 2013 in order to lower the NPL ratio and allocated a large amount of reserves to increase coverage. By the end of 2013 the Bank’s NPL ratio had fallen to 0.42% and coverage had risen to 265.57%, reflecting a large improvement in asset quality. In May of 2014, the Bank’s credit ratings as assessed by the Taiwan Ratings Co. were as follows: outlook stable, long-term credit rating “twAA-,” and short-term credit rating “twA-1+.” 2 In 2014, with the U.S. debt ceiling issue having been resolved, the economy continuously warming up, QE gradually being withdrawn, and interest rate rises not expected before the last half of next year at the earliest, U.S. GDP growth is projected to be better this year than in 2013. The European economy will shake off its recession and, although the performances of the different economies will still show divergence, economic growth in the euro zone is predicted to switch from negative to positive this year. The government of mainland China will seek balance as it carries out job preservation, risk control, and reform, and that country’s GDP growth this year is projected to remain the same as in 2013. Japan is the country with the most clear- cut loose-money policy, and this year it may expand its asset purchases to offset the impact on consumption tax; Japan’s GDP growth, too, is expected to remain the same as last year. In Taiwan, with the seven-in-one elections coming up at the end of the year, the increase in private consumption and government spending will give GDP momentum a boost and, because of the improved international and domestic environments, economic growth is expected to be better this year than last. The Bank will continue its efforts to enhance its financial quality in 2014. First of all, we will maintain our current momentum for growth in deposits and loans so as to consolidate our operating base by keeping up our capital adequacy ratio while, at the same time, working toward the strategic objectives of assured stable profit growth through continuous adjustment of the profit structure by lowering capital costs, readjusting the loan structure, and increasing fee income. We will also carry through with business plans such as the vigorous implementation of cash management, maintenance of high growth momentum in the consumer loan business, enhancement of credit card market share, strengthening of the wealth management business, deepening of the foreign-exchange business, and development of the TMU business. In the field of asset quality, we will coordinate with the revision of the law by boosting the provision for losses on Tier 1 credit assets, ahead of the required time, from 0.5% to 1%. The Bank will allocate approximately NT$700 million in additional reserves against bad loans so as to prepare a healthy operating capability to cope with possible economic downturns in the future. In overseas markets we will speed up our deployment in Southeast Asia; this year we hope to set up a branch in Vietnam and a representative office in Myanmar, and in the future we will plan for the establishment of a branch in Cambodia and representative office in China so as to continue our expansion and further cultivate customers among Taiwanese businesses in Southeast Asia. To take full advantage of the synergies of holding-company cross-marketing, we will continue reinforcing our cooperation with other member firms of the financial holding group in order to enhance the benefit of financial operations; at the same time, we will strengthen the development of new types of financial businesses and the introduction of new financial-planning products that satisfy the needs of different customer groups, allowing us to expand our operational scale and offer a complete range of financial services. With the care and support with which our customers, our parent financial holding company, and our directors and supervisors have favored us over the years, the Shin Kong Bank will continue working ceaselessly to boost its operating performance to new heights so that we can pay something back to our parent financial holding company and to society. 3 Company Background The Shin Kong Bank was reorganized as a commercial bank in January of 1997. Its forerunner started out in April of 1918 as the Manka Credit Union, organized by a group of gentry to serve as the financial needs of the local people. With the promulgation of new laws by the government of the Republic of China following Taiwan’s restoration to Chinese administration in July 1945, the Manka Credit Union received permission to reorganize into the Taipei Manka Credit Cooperative. In response to a further revision of the law, the credit cooperative was reorganized again in June of 1966, transforming it from a limited liability organization into a guaranteed liability organization under the name Guaranteed Liability Taipei Third Credit Cooperative—the “Taipei Third Credit Cooperative”—as it existed up until its reorganization into a commercial bank. After its reorganization into a bank the Company worked in line with government policy to help resolve financial problems by taking over the Second Hsinchu Credit Cooperative in 1997, creating Taiwan’s first example of a private bank absorbing a credit cooperative, and the following year taking over the Eighth Taichung Credit Cooperative, thereby expanding its operations into central Taiwan. At the first of September 2001 the Bank absorbed the Second Chiayi Credit Cooperative and, pursuant to the operation of the Financial Reconstruction Fund, took over the Gangshan Credit Cooperative in the middle of the same month. This expanded the Bank’s operations to a total of 80 branches throughout Taiwan. The Bank responded to the trends of development in the financial market and to the government policy of financial reform by joining the Shin Kong Financial Holding Co. as a wholly owned subsidiary on Oct. 3, 2005. On Dec. 31 that same year the financial holding company moved to expand the integrated operating scale of its banking platform and enhance its competitiveness by merging the Macoto Bank with the Taiwan Shin Kong Commercial Bank (itself the result of the July 1, 2000 merger between the Taichung Sixth Credit Cooperative and the First Pingtung Credit Cooperative to form the United- Credit Commercial Bank, which was renamed the Taiwan Shin Kong Commercial Bank on Nov.